Do I need to file Schedule M-2 for Form 1120-S if our company made under $250,000?

Thanks for clarifying! That's what I thought from my research but wanted to make sure. So basically Schedule L and M-1 have the $250k threshold exemption, but M-2 is required regardless? Is there any downside to not having filed it for that first year? Should we file an amended return?

Yes, that's exactly right - Schedule L and M-1 have the $250k threshold exemption, but M-2 is required regardless of income or asset level. As for not filing it in the first year, it's not automatically going to trigger an audit, but it does create a gap in your AAA tracking which could cause problems down the road. The AAA balance affects how shareholder distributions are taxed in future years. Whether you should amend really depends on what happened in that first year - if you had retained earnings or made distributions, having an accurate M-2 becomes more important. I'd suggest discussing with your accountant about preparing an amended return or at least documenting the correct AAA balance internally to ensure future years' calculations are correct.

How exactly does this tool work? I'm having similar issues with my S-Corp filing but I'm suspicious of tax tools that aren't directly from the IRS. Does it just analyze existing returns or does it help file them too?

I'm skeptical - wouldn't a regular CPA just know this stuff? How much did this service cost you vs just hiring a better accountant? Also how secure is your tax data on their platform?

The tool works by having you upload your tax documents (you can also take pictures of paper forms), and it uses AI to review them against current tax rules and regulations. It doesn't file returns for you - it's more of an audit tool that spots errors or omissions and explains the correct approach. Regarding security, they use bank-level encryption and don't store your documents after analysis. I was hesitant at first too, but it ended up being way cheaper than paying my CPA for additional hours of work just to answer questions. Even good CPAs make mistakes sometimes or might not fully explain why certain forms are required - this just gave me more confidence in understanding my own business taxes.

How does this actually work? Does it just hold your place in line or something? I've tried calling the IRS business line like 5 times and always get disconnected after waiting forever.

Sounds like a scam to me. Why would I pay some random service when I can just keep calling the IRS myself? I doubt they have any special access that regular people don't.

It works by using technology to navigate the IRS phone tree and wait on hold for you. When they reach an actual agent, you get a call to connect with that agent. It's not holding your place - they're literally on the phone waiting instead of you. For your skepticism, I totally get it. I was hesitant too, but after my fifth attempt trying to reach someone at the IRS and getting disconnected after 90+ minutes of waiting, I was desperate. It's not special access - it's just them doing the waiting for you. For time-sensitive tax questions, especially for small business owners, the time saved was absolutely worth it. I got a definitive answer about Schedule M-2 requirements directly from an IRS agent instead of trying to interpret instructions or rely on possibly outdated online advice.

Does this mean we need to file an amended return if our accountant didn't complete Schedule M-2? Or can we just start tracking the AAA now and include it in future returns?

Whether to amend or not depends on your specific situation. If you made no distributions to shareholders in that first year and had minimal activity, you might be able to reconstruct the AAA balance and just ensure it's accurate going forward. However, if you had significant transactions affecting equity or made distributions, filing an amended return is usually the safest approach. The main risk of not amending is that without proper AAA tracking, future distributions might be incorrectly classified for tax purposes, potentially causing shareholders to pay more tax than necessary or triggering IRS questions down the line. I generally recommend discussing with a tax professional who can review your specific situation and advise on the best approach for your company.

What would happen if someone hasn't been filing it though? My accountant hasn't completed it for my S-Corp for 3 years now!

Not filing Schedule M-2 for 3 years is definitely a problem you need to address. The IRS could potentially flag this during an audit since it's a required schedule. More importantly, without proper AAA tracking, any distributions you've taken might not have been reported correctly on your personal tax returns. I'd strongly recommend working with a qualified tax professional to file amended returns for all three years. The longer you wait, the more complicated it becomes to reconstruct the AAA balances accurately. You might also face penalties for incomplete filings, though these are often waivable if you can show reasonable cause (like relying on professional advice). Don't panic, but definitely don't ignore this either. Many S-Corps have dealt with similar issues and gotten them resolved through amendments.

I went through almost the exact same situation last year! Reconstructing the AAA balance for multiple years isn't as scary as it sounds, but it does require going through all your corporate records systematically. You'll need to track: starting capital contributions, retained earnings each year, distributions made to shareholders, and any other equity adjustments. The good news is that if you have your original 1120-S returns (even without M-2), most of the information you need is already there in other schedules. Regarding penalties - in my experience, when you can show you were following professional advice and you're proactively correcting the issue, the IRS is usually reasonable about penalty abatement. The key is being upfront about the error and demonstrating good faith effort to fix it. I'd recommend gathering all your corporate bank statements, distribution records, and prior returns before meeting with your accountant. This will help speed up the reconstruction process and potentially save on professional fees. Don't put it off though - the sooner you address it, the easier it will be to recreate accurate records.

That's a really important point about checking personal returns too! I hadn't even thought about the downstream effects on individual tax filings. This is getting more complex than I initially realized - not only do we potentially need to amend corporate returns for the missing Schedule M-2, but we might also need to review and possibly amend personal returns if distributions were misclassified. Do you remember roughly how long the whole process took from start to finish? I'm trying to get a sense of the timeline so I can plan accordingly. Also, did you work with the same accountant who made the original error, or did you switch to someone else for the corrections? I'm honestly losing confidence in our current CPA after this mistake.

The whole process took about 6 months from start to finish, but that included some back-and-forth with the IRS on the amended returns. The actual reconstruction work took maybe 3-4 weeks once we had all the documents organized. I did switch accountants - honestly, after discovering such a fundamental error that persisted for multiple years, I lost trust in their S-Corp expertise. The new CPA I worked with specialized in small business tax issues and was much more thorough in explaining the requirements and implications. One tip: when you're looking for a replacement, specifically ask potential CPAs about their experience with S-Corp compliance and AAA tracking. You'd be surprised how many general practice accountants aren't fully comfortable with the nuances of S-Corp taxation. The extra cost of working with someone who really knows S-Corps inside and out was absolutely worth it for the peace of mind. Also, don't feel bad about questioning your current accountant's competence - this isn't a minor oversight. Schedule M-2 requirements are pretty basic S-Corp knowledge, so missing it for multiple years raises concerns about what other issues might exist in your filings.

Great questions about vetting a new CPA! When I was interviewing replacements after my Schedule M-2 issues, here are some specific questions that helped me identify truly knowledgeable S-Corp practitioners: 1. "Can you explain the difference between AAA, OAA, and PTI accounts in S-Corp equity tracking?" - A good S-Corp CPA should be able to explain these clearly. 2. "What schedules are required vs optional for S-Corps under the $250k threshold?" - They should know M-2 is always required while L and M-1 are optional. 3. "How do you handle basis tracking for S-Corp shareholders?" - This gets complex with loans to/from shareholders and they should demonstrate understanding. 4. "What's your process for reviewing prior year AAA balances when taking on a new S-Corp client?" - Shows they understand continuity issues. Also ask for references from other S-Corp clients and consider asking to see a sample completed 1120-S (with client info redacted) to verify their work quality. The extra due diligence upfront can save you major headaches later! You're smart to review your past filings now rather than waiting. Even if you find issues, proactively addressing them is always better than having the IRS discover them first.